Offers in Compromise
The process of submitting an Offer in Compromise and obtaining IRS acceptance is complicated. Success requires substantial attention to details, and compliance with a variety of IRS regulations, procedures and guidelines. The difference between approval and rejection of your OIC is often the knowledge, experience and judgment of your tax professional.
Your professional advisor’s knowledge, experience and judgment are even more important now. On May 17, 2006, the president signed into law the Tax Increase Prevention & Reconciliation Act of 2005, adding substantial complexity to the IRS Offer in Compromise program and making the submission of an offer ever more difficult. Along with many other revisions and roadblocks contained in the new Act, this legislation requires a taxpayer to submit a substantial (20%) down payment with a “lump sum offer” or to begin making his or her first installments immediately upon submission of an installment payment offer. Compliance with the new down payment requirements and other hurdles created by the Act requires careful planning and execution.
An Offer in Compromise (OIC) is an agreement between the taxpayer and the government that settles a tax liability for payment of less than the full amount owed. The IRS will generally accept an OIC when it is unlikely that the tax liability can be collected in full and the amount offered equals at least the amount that the IRS calculates that it can collect from the taxpayer’s equity in assets and disposable monthly income. This determination is referred to as the “reasonable collection potential.” The IRS views an OIC as a reasonable alternative to declaring a case currently not collectible or entering into a “protracted installment agreement” with a taxpayer. A “protracted installment agreement” is defined as being one that extends beyond the period allowed under IRS-issued guidelines.
The IRS goal in approving an OIC is to achieve collection of the amount that it believes to be potentially collectible from a taxpayer at the earliest possible time and the least cost to the government. In addition to its collection goal, the IRS expects that its acceptance of an adequate offer will result in creating for the taxpayer a fresh start toward compliance with all future filing and payment requirements. Once an offer is accepted, the taxpayer must remain in compliance with all filing and payment requirements for the next five years.
There are three different kinds of Offers in Compromise and three different payment periods that may apply to an offer.
- Cash (paid in 90 days or less after acceptance);
- Short-Term Deferred Payment (more than 90 days, up to 24 months); or
- Deferred Payment (offers with payment terms over the remaining statutory period for collecting the tax).
Kinds of Offers in Compromise:
- Doubt as to Collectability. Doubt exists that you could ever pay the full amount of tax owed. Before the IRS can consider a doubt as to collectability offer (absent special circumstances), the taxpayer must not be able to pay the taxes in full either by liquidating assets or through current installment agreement payment guidelines. You must submit the appropriate collection information statement along with all required supporting documents.
- Doubt as to Liability. This means that doubt exists that the assessed tax is correct. This method only applies if you can prove that you do not owe the tax assessed against you, not because you are unable to pay the tax liability. If you do not think that you owe the tax liability, then you may submit an OIC for “Doubt as to Liability.” In a Doubt as to Liability Offer, you must submit a detailed written statement explaining why you believe you do not owe the tax that you want to compromise.
- Effective Tax Administration (ETA). An ETA offer is made when a taxpayer agrees with the amount that the delinquent tax amount that the IRS is seeking to collect and would be able to pay the full amount owed, but an exceptional circumstance exists that would allow us to consider your offer. To be eligible for compromise on this basis, you must demonstrate that the collection of the tax would create an economic hardship or would be unfair and inequitable. If you are requesting an ETA offer, you must submit a collection information statement with all appropriate attachments, and a written narrative explaining your special circumstances and how payment of the full amount would create an economic hardship or would be unfair and inequitable.
In order to submit, and ultimately receive IRS approval, of an Offer in Compromise, a taxpayer is required to provide the IRS with a wide range of financial documentation used to evaluate the taxpayer’s ability to pay. The IRS considers the amount that could be obtained from the equity in your house and other assets, plus any additional amount that you should “reasonably” be able to pay from your monthly budget. Your OIC package will include a recent financial statement prepared on an IRS Form 433-A (Individual or Self-Employed Taxpayers) and/or Form 433-B (Business Taxpayers), and is often supported by recent bank statements, tax returns, paystubs, house and property appraisals, deeds, car titles, monthly expense invoices and receipts, and a variety of other financial documents. These documents are used by the IRS to confirm your eligibility for an OIC and determine the settlement amount it will accept. The IRS reviews your financial information in the light of its own income and expense standards. The IRS does not compute your “reasonable collection potential” by subtracting your actual monthly expenses from your monthly income. Rather, the IRS determines your allowable monthly expenses by using a complex set of artificial national and local expense standards based on family size and yearly income.
After the IRS completes its review, it makes a determination whether to accept or reject the Offer in Compromise. If the OIC is rejected, the taxpayer has a variety of alternatives available. For example, the taxpayer can appeal to the IRS Appeals Office, and ultimately, the United States Tax Court, propose an alternative collection method (for example, an Installment Agreement), or seek to be classified as Currently Not Collectible. On the other hand, if the Offer is accepted, the taxpayer is required to make the payments proposed in the Offer and the remaining amount of the taxpayer’s tax liability is forgiven. Remember, however, in addition to the payment requirements of an approved Offer, the taxpayer must then remain compliant with future tax filings and payments for the next five years or the Offer will be revoked and all benefits lost. If a taxpayer fails to remain compliant, the Offer will be annulled and all delinquent taxes will once again be due and owing.
For taxpayers that qualify, an Offer in Compromise is an excellent way to resolve a tax problem and get a fresh start with the IRS. However, the decision to make an Offer in Compromise is complicated and success depends on the proper application of knowledge, experience and attention to detail. If you have a problem with delinquent taxes, begin to solve your problem today by contacting me at The Gaymon Law Firm, PLLC, telephone (703) 407-9130, or by completing the Contact Form contained on this Web site.